Do Economists Believe in “Atomistic Individualism”?

To many critics economics goes astray in characterizing people as isolated, autistic, self-interested, individualistic utility maximizers, unconnected from the broader social fabric in which they are embedded. The celebrated Ferraro, Pfeffer, and Sutton paper (AMR, 2005), and the broader “performativity” critique of economics, is a typical example of this attitude. Some heterodox economists even long for a “post autistic” version of the discipline.

As emphasized repeatedly on this blog, however, the criticism is fundamentally mistaken. At heart, it confuses methodological individualism with ontological individualism. The assumption of individual utility maximization, the simplified model of an isolated individual, and the like are principles of explanation, not descriptions (or, a fortiori, prescriptions). Now, I do think that economists have gone astray by emphasizing “rationality,” modeled with consistent preferences, a utility function that is monotonic and non-decreasing, etc., rather than the broader concept of “purposeful action,” as Mises described it, which is what most economists before the formalist revolution seemed to have had in mind.

Anyway, here are some nice quotes from Mises — whose approach is often caricatured as an extreme, outdated example of a ruthless, rugged individualism — on the individual in society.

No other imaginary construction has caused more offense than that of an isolated economic actor entirely dependent on himself. However, economics cannot do without it. In order to study interpersonal exchange it must compare it with conditions under which it is absent. It constructs two varieties of the image of an autistic economy in which there is only autistic exchange: the economy of an isolated individual and the economy of a socialist society. In employing this imaginary construction the economists do not bother about the problem of whether or not such a system could really work. They are fully aware of the fact that their imaginary construction is fictitious. Robinson Crusoe, who, for all that, may have existed, and the general manager of a perfectly isolated socialist commonwealth that never existed, would not have been in a position to plan and to act as people can only when taking recourse to economic calculation. However, in the frame of our imaginary construction we are free to pretend that they could calculate whenever such a fiction may be useful for the discussion of the specific problem to be dealt with (Human Action, 3rd edition, p. 243).

And this, from Theory and History (1985, pp. 251-52):

Let us first examine the concept of society in general. Men cooperate with one another. The totality of interhuman relations engendered by such cooperation is called society. Society is not an entity in itself. It is an aspect of human action. It does not exist or live outside of the conduct of people. It is an orientation of human action. Society neither thinks nor acts. Individuals in thinking and acting constitute a complex of relations and facts that are called social relations and facts.

The issue has been confused by an arithmetical metaphor. Is society, people asked, merely a sum of individuals or is it more than this and thereby an entity endowed with independent reality? The question is nonsensical. Society is neither the sum of individuals nor more nor less. Arithmetical concepts cannot be applied to the matter.

Another confusion arises from the no less empty question whether society is — in logic and in time — anterior to individuals or not. The evolution of society and that of civilization were not two distinct processes but one and the same process. The biological passing of a species of primates beyond the level of a mere animal existence and their transformation into primitive men implied already the development of the first rudiments of social cooperation. Homo sapiens appeared on the stage of earthly events neither as a solitary food-seeker nor as a member of a gregarious flock, but as a being consciously cooperating with other beings of his own kind. Only in cooperation with his fellows could he develop language, the indispensable tool of thinking. We cannot even imagine a reasonable being living in perfect isolation and not cooperating at least with members of his family, clan, or tribe. Man as man is necessarily a social animal. Some sort of cooperation is an essential characteristic of his nature. But awareness of this fact does not justify dealing with social relations as if they were something else than relations or with society as if it were an independent entity outside or above the actions of individual men.

Joe Salerno’s article “Ludwig von Mises as Social Rationalist” provides additional commentary. As Joe emphasizes, for Mises the fundamental “social” relationship is the division of labor, which necessarily places individual actors in a social context. The idea of the isolated individual is a thinking tool, an artificial construct that is useful in reasoning, and nothing more.

But what are the dangers of taking that ‘tool for thinking’ too far? Isn’t that the real critique of the performativity folks – that this (incredibly useful) caricature is being made all too literal at times? I’m not as worried about the published works of professional economists as I am about the undergraduate level teaching, and the policy prescriptions that are based on these tools for thought (especially when other ways of thinking have much less sway in some of those arenas).

Economists may understand the distinction between methodological and ontological individualism, but do all of their students, and consumers of the knowledge they create? Given the attitude in much economic advising (see, for example, Mankiw’s recent op-ed on free trade where he compares non-economists to “mere Muggles” in the opening passage, half in jest I’m sure, but with a bit too much bite). What do people learn when they learn that the rational person thinks at the margin? How does that not just serve as a useful tool for understanding certain kinds of behavior, but rather a stand-in for all the complexities of human action? Etc.

Wait, so you’re trying to recast Economics as being ‘Sociologically aware’ all along (a discipline that has a very well defined history beginning with Positivist attempts at social fact making in 19th Century France)?

If that’s the case, you’ll need to find a MUCH better quote than one that includes this:
“The evolution of society and that of civilization were not two distinct processes but one and the same process. The biological passing of a species of primates beyond the level of a mere animal existence and their transformation into primitive men implied already the development of the first rudiments of social cooperation.”

Dan, your point that economics, taught poorly, can resemble its caricature is well taken. All stereotypes are based on something real, after all. And it is certainly true that Sutton, Ghoshal, Pfeffer, et al. oppose the place of economics in the curriculum, particularly at the MBA level. But I think it is too charitable to characterize them as opposing merely poorly taught economics. They seem to regard economic analysis itself as a beast that must be tamed.

dk, I’m not sure I understand you, but yes, economic analysis has always recognized that human action takes place in a social context. That doesn’t mean, of course, that the early economists possessed the full conceptual analysis of modern sociology (although important thjnkers like Spencer, Marx, and Pareto made contributions to both fields).

I believe that the problem lies in the extension of certain models beyond the scope where they ‘feel’ useful and more or less accurate. The model of the rational, self-interested actor is very much a model of conscious decision making – the weighing of costs and benefits against a well-specific utility function.

This is the sort of analysis that won economists much recognition when fruitfully applied to, for example, US Government production during World War II (see, for example, Bernstein’s 2001 “A Perilous Progress”). This model also makes a lot of sense when it comes to firms making certain kinds of decisions – to invest in new machinery or something like that. The decision making process looks a lot like the model.

But many economists (from Samuelson in some ways through Becker) make a much stronger claim: that all human action conforms to some version of this model. All decisions reveal preferences, and thus can be modeled the way we model a conscious agent choosing with a well-specified loss-function, all the while ignoring the internal machinery. I think this sort of analysis generates a lot of resistance – the way people decide whether or not to vote for a candidate, to vote at all, to give money to charity, to accept or refuse an offer for a date, etc. may or may not look anything like the US Government deciding how many tanks, planes and rifles to produce. To the extent that it does not – and psychologists and sociologists have documented numerous examples – this rational, self-interested model falls apart.

And that’s fine, as long as we don’t expect too much from it, nor promise too much with it. But Becker doesn’t claim to explain only certain kinds of behavior. His approach purports to be general, universal, ahistorical.

The problem with assuming that individuals maximize welfare “as they conceive it” (from Becker’s nobel lecture) is that we have to bring psychology and sociology back in in a strong way. And yet, Becker and those who follow him often still draw conclusions from stripped down models of preferences and welfare.

Anyway, I’ll stop here, but there’s just a few more ideas.

5.James | 15 April 2008 at 4:14 pm

I know the source material is quoted from a secondary source, but enough with the “autistic” descriptor. It’s not accurate, it confuses the issue, and it is a disservice to those with an ASD diagnosis.

If the author means ‘socially isolated’ or “not mindful of others,’ then there are more precise terms available.

Currently I am drowning in literature on methodological individualism, situational analysis (praxeology) and the rationality principle. This is a memo to myself as much as anyone else, but it will really help when people who write this stuff spell out the difference it would make to the things that other people actually DO during the day.

On the biological and evolutionary theme broached by Salerno on Mises, there is a paper by Gerard Radnitzky on the factors that gave rise to the “European miracle” of freedom and prosperity, along with a warning about the fragility of that achievement. http://www.the-rathouse.com/radscience.html

Radanitzky is one of the people who bridged the divide between Popper and the other Austrians, so he would be a worthy person to deliver the inaugural Popper Memorial Lecture at the Mises Institute.

To be concrete, when was the last time you read a paper on epistemology or methods and you thought “Gee, as a result of reading that paper I will need to ask different questions, or I will need to look for different answers, or collect different information or process it in some different way, and maybe read different journals”? And if you think you are doing everything right, what sort of arguments would you use to change the approach of someone in the same field who is working quite differently – not just the difference that makes for good arguments but the difference that impedes communication?

8.Brian Pitt | 23 April 2008 at 6:54 am

I am not sure if this is a “dead thread,” but I think that MIsean “purposeful action” is not “broad enough.” Or, it has not been mostly studied as an expansive concept, which will assist in the study of human action. In fact, the focus has been almost exclusively on “catallaxy.” And, if catallaxy, what Mises masterfully articulated in Human Action, is merely one component of an expansive “praxeology,” why do many Austrians neglect “communicative action” and jettison a research program in philosophical hermenuetics? It is my belief that many outside of economics proper would be more sympathetic to methodological individualism insofar as Austrians pay more attention to the praxeological categories of “communication,” “habit,” (and dare I even say—-“indifference”).

The categories of praxeology may be outlined as follows:
Praxeology–the general, formal theory of human action:
A. The Theory of the Isolated Individual (Crusoe Economics)
B. The Theory of Voluntary Interpersonal Exchange (Catallactics, or the Economics of the Market)
1. Barter
2. With Medium of Exchange
a. On the Unhampered Market
b. Effects of Violent Intervention with the Market
c. Effects of Violent Abolition of the Market (Socialism)
C. The Theory of War — Hostile Action
D. The Theory of Games (e.g., Von Neumann and Morgenstern)
E. Unknown
Clearly, A and B — Economics — is the only fully elaborated part of praxeology. The others are largely unexplored areas.

10.Brian Pitt | 24 April 2008 at 6:12 pm

Thanks for the update Dr. Klein!

I am still of the opinion that the “unknown” component of praxeology is the area most ripe for interdisciplinary study. Hoppe’s argumentation ethic is a great step in that direction because (1) it is a praxeological effort that attempts to deduce implications from the primodial fact of human action and (2) it attempts to deduce universal moral implications that give rise to a moral discourse. I just hope that more non-catallactic work is on the way.

Up to about 1930 Mises spoke of sociology as the larger field of the sciences of human action but then he decided that the discipline of sociology was so anti-economics as to be a waste of space and he changed his terminology to praxeology. During the 1930s two other lines of thought converged on praxeology. One was Talcott Parsons who developed the “action frame of reference” in “The Structure of Social Action” (1937). The other was Karl Popper with “situational analysis” in “The Poverty of Historicism” (1943/44 and 1957). Both held up the hope of finding sociological laws that would extend beyond markets to other areas of the human sciences. Parsons failed because he turned to general sytems theory (inspired by classical mechanics) and Popper’s program never made effective contact with the Misean tradition despite Hayek having a foot in each camp.http://www.the-rathouse.com/shortreviews/Mises-Epistemological-Problems.html

The major impediment to a Popper-Mises raprochment is the insistence of the Miseans that Popper is a positivist despite the fact that he (like Mises) identified positivism and historicism as the two great errors of the social sciences. The latest blow in this strange self-mutilating campaign is the Mises daily article (25 April) http://mises.org/story/2944

The body of the text describes Popper as a positivist/empiricist while the link to Popper that is provided to substantiate the argument states “Popper coined the term critical rationalism to describe his philosophy. The term indicates his rejection of classical empiricism, and of the observationalist-inductivist account of science that had grown out of it.”

Very strange!

12.Brian Pitt | 28 April 2008 at 7:05 am

You are right about that Rafe…strange indeed!

I am totally on board with Popper and Parsons insofar as they are writing about “The Poverty of Historicism” and “The Structure of Social Action.” Parsons lost a few Austrian fans with his systems theories and Popper was a bit of a positivist. But wasn’t Mises?

As you know, Mises was not exactly consistent with his (dubious) claim that theory should be sharply distinguished from history. And I think that his regression theorem, from the Theory of Money and Credit, speaks to that! (Nevertheless, I still believe that MIses and Weber were two of the top ten social scientists of the twentieth century—maybe one and two.)

The claim of economists as “atomistic” comes from, methinks, (1) many outside of economics speaking about economics without a shred of basic econ knowledge, (2) economists averring that the (utility) assumptions of micro-economics may be used to explain human behavior outside of instrumental and strategic action (e.g., Becker and Buchanan), and (3) the claim that theory should be sharply distinguished from history.

Popper, like Mises, was a positivist in the sense of taking evidence seriously and that makes positivists of us all, most of the time. As to the analytical distinction of history and theory, that can be found in Weber, Mises, Parsons and Popper. It just means that you need to be clear whether at any moment you are doing historical explanation (using theories) or testing theories (using historical data or current experiments or observations). If you think of life as a carpet, the historical threads run longways and the theoretical threads run crossways.

Flying a kite to compare Newton and Mises and the claims that they made for their methods. Newton in some of his moods insisted that he was a perfect inductivist/empiricist, drawing his theory from the data without any speculation (I feign no hypothesis). And it was such a good theory that it was for a long time virtually impossible to refute by accurate (or true) observation statements. Bear in mind that there are two reasons why a theory may be impossible to refute (a) because it is tautological and (b) because it is true. And Newton’s theory was so close to the truth that it is still good enough for most of our practical purposes.

Imagine if Newton had defended his theory on the basis of the inductive method that he claimed to use to invent it? Instead of the capacity of his theory to explain things, stand up to criticism, link to other theories, inspire progressive research etc. We might have seen Newton and later physicists spending half their careers teaching and defending inductive logic instead of getting on with inventing and testing theories in physics. In the end, inductive logic was left in the hands of the philosophers of science and ceased to be a bugbear for working scientists.

Whether or not Mises was the Newton of the human sciences, it is a shame that so much effort is spent defending the a priori method, (and rubbishing poor old Karl Popper) instead of just getting on with economics. If the theorems of praxeology stand up to criticism and work in practice, why worry how they were invented?.

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One bad consequence of methodological individualism is the complete lack of formal work in cooperative game theory as compared to competitive game theory. There is really no justification for this lack of attention, except for bad metaphysics.